Make and Sell or Buy of Web Services a Real Option Approach

Abstract

The emergence of the web service market in the last years offers more and more the opportunity for companies to buy web services from external service providers as an alternative to develop them internally. Such considerations are well-known in IS literature and discussed in the context of IT outsourcing and make-orbuy decision making regarding IT applications. However, characteristics of web services like loose coupling or highly standardized interfaces open the door for a further opportunity to companies: If a company decides to internally develop a web service (make decision), it has additionally the right (but not the obligation) to sell it on the electronic web service market. The present paper examines how such a sell option can be modeled to enhance traditional make-or-buy approaches to a make-and-sell or buy approach for web services. To evaluate the sell option, we draw on real option analysis which is frequently used in valuating IT assets like IT applications. Furthermore, we apply our approach in a real world example of a financial service provider to demonstrate its applicability and practical benefits. By doing so we illustrate that the option to sell a web service may have considerable impact on traditional make-or-buy decisions.